Amid a challenging market environment and macroeconomic instability, smart beta or factor-based investing has seen an uptick in investor interest, according to research from Cerulli Associates.
Fabrizio Zumbo, Director, European Asset and Wealth Management Research at Cerulli Associates.
In the latest issue of The Cerulli Edge — European Monthly Product Trends, Cerulli notes that the economic backdrop of low or negative growth, combined with stagnant wages and higher inflation, has created improved conditions for smart beta approaches based on fundamentals such as value or dividends.
Assets under management of fundamentals-tilted funds have been more stable than those of traditional strategies – by November 2022, smart beta ETFs listed in Europe housed €93.7 billion ($103.5bn) AUM compared to €102.1bn in December 2021, according to data from Morningstar.
Value was the standout factor in 2022 in terms of both performance and flows, relative to market cap-weighted funds.
Fabrizio Zumbo, Director, European Asset and Wealth Management Research at Cerulli Associates, said: “Value strategies outperformed traditional market-cap-weighted ones in 2022, largely due to their energy overweight. Quality strategies did worse than value strategies in 2022, but as they tend to do better during recessions, they could potentially outperform in 2023.”
Issuers of smart beta ETFs in Europe are also increasingly bullish, especially in the UK. One in five (20%) issuers think there will be fast growth (more than 10%) in UK-listed smart beta ETFs over the next 12 to 24 months, a quarter (23%) think there will be moderate growth (between 6% and 10%), and 43% predict slow growth (between 1% and 5%).
Switzerland is poised to experience the second-highest level of growth with 17% of issuers expecting fast growth, 31% moderate growth, and 23% slow growth.
The market that is expected to grow the least is Italy where 40% of smart beta ETF issuers said there will be no growth over the next 12 to 24 months.
“Smart beta growth across Europe will depend on how these factor-based strategies perform during the challenges that 2023 brings and whether this performance is enough to attract investor flows,” concluded Zumbo.